Insurance proposals imperil tourism and home-sale gains

Saturday

Apr 27, 2013 at 10:49 PM

By JOSH SALMANjosh.salman@heraldtribune.com

Sharp rate increases proposed for the state's largest property insurer could threaten Florida's flagship real estate and tourism industries just as they're turning the corner from the downturn and the Gulf oil spill.

Coming off the strongest season for visitation and home sales since the Great Recession took hold, higher insurance premiums levied by Citizens Property Insurance Corp. could rock the two segments of the economy now leading Southwest Florida's recovery.

Condominium associations from Englewood to Anna Maria Island are considering new caps on short-term rentals to mitigate the blow from the state-run carrier. But many businesses that depend on tourism spending worry that the loss of available rooms in the short-term rental pool will drive prices higher and push visitors to other beach destinations.

Coastal condo sales, too, could falter as buyers reconsider a Southwest Florida retirement in the face of mounting premiums.

"It is a huge concern for us," said Kevin Cooper, executive director of the Siesta Key Chamber of Commerce. "Consumers will be forced to absorb these increases. From a cost perspective, the fear is they will go somewhere else."

Condo associations are already reacting to a Citizens rule approved last year that shifts condos into the realm of commercial policies if more than 25 percent of the units are used for short-term rentals, limiting coverage to $1 million per building.

The repairs that would be needed after a major storm could easily surpass that level of coverage, forcing associations to turn to private carriers — including the unregulated surplus lines market — to make up the insurance difference. In turn, that could balloon total insurance spending by as much as 600 percent, property managers estimate.

But the pain does not end there.

Florida lawmakers might advance a bill that would increase some Citizens rates to help downsize the state-run company, potentially boosting premiums by 37 percent in Sarasota County and 27 percent in Manatee for new customers.

It is unclear where the insurance changes will end up.

Big rate increases already approved by the Florida Senate were left out of House legislation unveiled on Friday. House Speaker Will Weatherford, R-Wesley Chapel, said House and Senate negotiators would try to "hammer out the differences" as lawmakers move toward adjournment this week.

Many will be watching those negotiations closely.

Finally breathing easier after years of recession-driven anguish, condo owners say the threat has put them back on edge.

"We will have to raise rates to compensate for that increase," said David Teitelbaum, who operates a series of condo resorts on Anna Maria Island. "And when people raise rates, it does affect occupancy, absolutely."

Floodgates

To avoid the more expensive commercial designation, many condo association boards have begun enacting new rules to limit short-term rental use in what have been predominantly vacation properties.

Others, like Teitelbaum, are passing the increases on to customers through higher room rates.

Teitelbaum said spiking Citizens premiums have forced him to raise the cost of a stay at one of his four resorts by 5 percent this year. He expects to boost rates higher later in the summer.

The trend has shrunk the supply of short-term rooms available for rent at a time when visitor demand is shattering records: there was a 95 percent occupancy rate in Sarasota during March.

Construction of new condos had largely been put on hold during the prolonged downturn. Because Southwest Florida always has been an area that relies on condos more than traditional hotels to host vacationers, the ramifications of the insurance shifts will be amplified here, said Virginia Haley, president of Visit Sarasota, the county's official tourism marketing arm.

There are 14,578 short-term rental units in Sarasota County, and 48 percent of them are condos, records show.

Haley said the Citizens changes could open the floodgates to illegal rental activity, with condo owners dodging sales tax and bed tax requirements through an underground tourism industry.

The problem already plagues Anna Maria, where homeowners have transformed duplexes and single-family homes into make-shift hotels, which often violate basic building codes and skate on tax bills.

"Ironically, at a time when we were finally beginning to get more bed inventory, this will greatly reduce the number of units and create the likely scenario of widespread cheating," Haley said.

Real estate agents are similarly concerned that spiking insurance premiums will pinch condo sales to baby boomers, who are again trekking to Southwest Florida in large numbers to make retirement purchases put on hold by the recession.

That could eventually affect construction jobs, local government revenues and even other business's cash registers — slowing the region's entire economy, some fear.

"It will have a pretty dramatic effect on our area," said Scott Petersen, a Sarasota real estate attorney, who works with many condo associations. "It just seems like a short-sighted approach."

Counterpoint

But lawmakers who are behind the move to shrink Citizens Property Insurance argue that the risk of the government-backed carrier failing in the wake of a major hurricane simply outweighs any potential problems for tourism and real estate.

With more than $400 billion in total exposure statewide, many lawmakers say the present premiums would not be enough to support Citizens after a major storm, leaving insurance customers statewide on the hook for any shortfall. Citizens has the power to tax most insurance lines in Florida to pay claims following a major disaster.

There are about 90,000 active Citizens policies in Sarasota and Manatee counties, which combine for $153 million in premiums and a total exposure of nearly $33 billion, the most recent Citizens data shows.

The 1.3 million Citizens policyholders statewide now pay an average of $2,250 per year for insurance.

Although economists acknowledge that the Citizens increases will likely push some of Florida's population increases inland, they do not believe it will significantly damage the Sunshine State's retirement pipeline. Many note that the impact of a catastrophic storm — with insufficient funds to cover damages — would likely scare away more homebuyers and tourists than any insurance increases.

The proposed Citizens boost for new policies passed the Senate last week, but awaits a final vote — and possible negotiated modifications — from the House.

"This is something that has to happen," said Sean Snaith, an economist with the University of Central Florida. "Insurance rates should be reflective of the risk for a particular piece of property, so we're not in a major loss situation should a catastrophe occur."

Looming threat

Consumer advocates have questioned the timing of the proposal, with Citizens more actuarially sound now than at any other time during the past seven years.

The carrier has built more than $6 billion in cash reserves without the claims from a direct hurricane hit on Florida. It has the finances to withstand all but the most catastrophic storm without resorting to assessments.

On the other hand, many private carriers are on much shakier footing, an issue the pending legislation does not address. Several major insurers are rated as weak and could fail after a large hurricane, subjecting insurance customers to the same assessments that lawmakers say they fear from Citizens. Many of the private insurers do not have large reserves, despite a record stretch without a hurricane striking Florida, because they rely on costly offshore reinsurance to cover liabilities.

The looming threat of higher insurance costs comes as both real estate and tourism have climbed back to their healthiest levels since the downturn.

More than 264,700 visitors booked an overnight stay in Sarasota County from Jan. 1 through March 31 — the three months considered peak season for the industry. That was a 5.1 percent jump from the same period in 2012, already a record-breaking year for tourism.

Those gains were mirrored in condo and town home sales, segments likely to be most impacted by any Citizens rate increases.

Sarasota, Manatee and Charlotte counties saw 492 multifamily units change hands during March, a 15 percent increase from February and a 4 percent jump from a year ago.

"We have seen this coming for a long time," said Tom Davis, property manager at Jamaica Royale, a condo rental community on Siesta Key. "All we can do is take a wait-and-see approach."

Dick O'Dowd considers himself one of the lucky ones.

The manager of the small 21-unit La Playa Condos on Longboat Key was notified several months ago that Citizens was dropping his complex's policy, a move that became effective Thursday.

O'Dowd was able to find a well-capitalized insurer that raised his premiums less than 10 percent from what his association had been paying Citizens.

"Some of the property managers on the island here are just pulling their hair out," he said. "They're concerned they will be placed with companies that are in a questionable financial situation or companies they know nothing about."

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